A discussion of market entry strategies in emerging markets

Table of content

List of abbreviations

List of figures

1 Introduction
1.1 Objective of the term paper
1.2 Course of investigation

2 Definition and characterisation of emerging markets

3 Factors affecting the market entry strategy
3.1 Internal factors
3.2 External factors
3.3 Chances and risks of entering emerging markets

4 Market entry strategies
4.1 Export
4.2 Contractual
4.3 Investment

5 Critical analysis of market entry strategies for emerging markets

6 Conclusion

Bibliography

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of figures

Figure 1: The portion of the BRIC countries of the global GDP from 2005 to 2015 2

1 Introduction

After the time of industrialism, business changed due to globalisation. By opening mar­kets more companies occurred on not native markets. And the world still grows closer. Through globalisation the access to markets is uncomplicated and the entrance is easier because economic rules are accepted worldwide to maximise profits and productivity.

In the early 1980s companies started to focus on emerging markets since markets of industrialised countries are saturated and a further expansion on those markets is un­promising. High growth potential, rapidly rising needs of the consumers and low com­petition attract companies of all sizes and various industries to enter emerging markets. But to guarantee a successful market entry internationalizing companies have to answer the following questions. What is the targeted market and how do they want to operate there? Crucial for the way of internationalisation is the market entry strategy.

1.1 Objective of the term paper

This term paper shall give an overview of different options to enter an emerging market and indicate a company about identifying the most promising market entry strategy. Which factors determine the market entry strategy for an emerging market? To answer these questions company and market specific factors in terms of emerging markets will be considered. E.g. company size, market potential or social and cultural differences might eliminate strategies already before. But are the chances opening up by entering an emerging market predominant and worth the risk?

1.2 Course of investigation

Following the introduction, the second chapter provides definitions of emerging markets and developing countries. Furthermore it illustrates the characteristics of emerging mar­kets on the basis of the BRIC countries. In Chapter three factors affecting the decision for a market entry strategy are displayed. Moreover this chapter includes chances and risks of entering emerging markets. Chapter four explains different market entry strate­gies which are then critically analysed with regard to the previous findings in chapter five. On this basis chapter six provides the conclusion including answers to the afore­mentioned questions.

2 Definition and characterisation of emerging markets

The term emerging market is used to describe the capital markets of emerging nations.¹ It was mentioned first in 1981 at the International Finance Corporation.² In general de­veloping countries have a low or middle income and a geographic distance to industrial­ised countries.³ But developing countries need to be distinguished in developing and relatively advanced or rather emerging countries.⁴

To identify an emerging market the country has to show an above average Gross Do­mestic Product and Per Capita Income. The Government needs to introduce specific industrialisation politics to adopt market based frameworks.⁵ Paradigmatically for these characteristics are the BRIC countries Brazil, Russia, India and China.⁶

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: The portion of the BRIC countries of the global GDP from 2005 to 2015⁷

As indicated in figure 1 the aforementioned BRIC countries already generate approx. 30% of the world's GDP by the end of 2015. The trend over the past decade shows the growing importance of developing countries. With the largest of all emerging markets China grows faster and in a more significant way compared to the remaining BRIC countries.⁸ They increased their GDP by 7% since 2005. This development is due to the interference of the government followed by steadily increasing incomes because people face better market conditions.⁹ For comparison only, Germany and other industrialised countries increased by 1-2%.¹⁰

These figures suggest a rapid growth which is one of the main characteristics of emerg­ing markets. The rapid growth is driven by the change of the customer's buying behav­iour due to higher incomes and better market conditions as mentioned before.¹¹ These changes cause strategy adjustments and product adaptations for companies to keep up with their customers.¹²

Besides, for emerging markets the lack of infrastructure is distinctive. That includes missing traffic systems, insufficient water supply and bad sanitary conditions. Further­more many people have no access to electricity. E.g., in China, the country accelerating most over the past decade, about 44% of the population lives rural without any connec­tion to developed areas.¹³ Thus the people cannot participate in consumption because of missing distribution channels. But this leads to the opportunity for western companies to set up appropriate distribution channels and to open up new sales areas according to the customer's and company's needs.¹⁴ Above all companies capable to adapt those condi­tions are able to enter the market and to generate revenue. But also local companies can use the situation in order to grow and participate.

3 Factors affecting the market entry strategy

Along with the internationalisation a strategy suitable for the targeted market needs to be examined. But there is a wide range of different factors to take into account. They are subdivided into internal and external factors.¹⁵ Additionally chances and risks of enter­ing emerging markets are potential impediments.¹⁶

3.1 Internal factors

Internal factors are company related factors and can be influenced.¹⁷ Control is im­portant for the company when entering a foreign market because initially it is unknown. One option to ensure control is to set up hundred percent owned subsidiaries to enable the company to act, work and decide by itself in the new market.¹⁸ In contrast to hat the use of intermediate undertakings, like distributors, result in a low level of control.

On the other hand flexibility is important to adapt changes of the market conditions. It serves as an indicator whether the company is able to recognize changes e.g. in the buy­ing behaviour and if it is able to respond to them. This is assured through the know how to establish new structures internally, the ability to assign relevant resources to the changes and diversification of products if necessary.¹⁹ If this were the case flexibility is a competitive advantage for the corporation.

3.2 External factors

But companies face not changeable factors known as external factors as well. Typical external factors are trade barriers that potentially prevent companies from going global. They are based on political decisions and embody the protection of the home market.²⁰ These barriers include tariffs, import and export licences or quality requirements as well as quantitative restrictions.²¹ Market restrictions cause costs and reduce marginal in­come and therefore inhibit market entries. E.g. after signing the Schengen Agreement to reduce trade barriers within the EU many companies internationalised.²² Associated with trade barriers, the market potential is one of the main external factors as well. It indicates the size and growth of and the competition within the market. The higher the market potential the more attractive is a market entry for foreign companies.²³

Another aspect is the social and cultural distance between the company's country and the foreign country. The higher the distance to the new market the more likely is a mar­ket entry strategy with a low level of control.²⁴ Many companies want to learn about social and cultural differences first. Thereby they capture values and behaviours of the potential target group by working together with local companies or distributors.²⁵

3.3 Chances and risks of entering emerging markets

In the process of finding the right market entry strategy the analysis of the company's risk aversion is essential. Is the company willing to take the risk of entering an emerg­ing market? The risk distribution starts in the business itself tailing in country specific risks.²⁶ Emerging markets offer different chances for companies. Especially in the pro­cess of developing an economy the opportunity to benefit is given. At this stage emerg­ing markets have a high growth potential. In contrast to already developed markets, stagnation or financial crises are unlikely.²⁷ Furthermore the potential business en­largement at cheap labour cost is appealing. A popular way to make use of labour cost is outsourcing services, e.g. technical support.²⁸

But on the other hand emerging markets involve various risks because of the early stage development. China and other emerging markets face a high level of corruption²⁹ and poor legal certainty.³⁰ Also entering new markets cause insufficient knowledge of the market and the culture as well. These risks might lead to an unsuccessful market entry if the strategy does not include the handling of it.

[...]

¹ Mobius 1995, p. 3

² Heakal 2015

³ Wagner and Kaiser 1995, p. 17

⁴ ibid., pp. 18-19

⁵ Krumnow et al. 2002, pp. 1149-1151

⁶ Ulrich et al. 2014, p. 423

⁷ Own illustration; reffering to: Statista 2016

⁸ Jain 2006, p. 384

⁹ Mahajan et al. 2006, pp. 12-17

¹⁰ Amadeo 2016

¹¹ Mahajan et al. 2006, pp. 12-17

¹² Amadeo 2016

¹³ The World Bank Group 2016

¹⁴ Cavusgil et al. 2002, pp. 32-41

¹⁵ Sanchez-Peinado et al. 2007; Shimizu and Hitt 2004

¹⁶ Koch 2001, pp. 354-356

¹⁷ Picot et al. 2014, p. 27

¹⁸ Sanchez-Peinado et al. 2007, p. 67

¹⁹ Shimizu and Hitt 2004, p. 49

²⁰ Hollensen 2011, pp. 55-67

²¹ Renner 1973, pp. 51-58

²² Myers 1995, pp. 44-45

²³ Gatignon and Anderson 1988, pp. 308-310

²⁴ ibid.

²⁵ Hollensen 2011, pp. 55-67

²⁶ Koch 2001, pp. 354-356

²⁷ Khanna and Palepu 2010, p. 1

²⁸ ibid., p. 2

²⁹ Transparency International 2014

³⁰ Puck 2011, p. 109